Sharing risk with the government: How taxes affect corporate risk taking
Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its down...
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sg-smu-ink.soa_research-26552019-01-21T02:34:35Z Sharing risk with the government: How taxes affect corporate risk taking LJUNGQVIST, Alexander ZHANG, Liandong ZUO, Luo Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government. 2017-06-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soa_research/1628 info:doi/10.1111/1475-679X.12157 https://ink.library.smu.edu.sg/context/soa_research/article/2655/viewcontent/Sharing_risk_with_the_government__How_taxes_affect_corporate_risk.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Risk taking corporate taxes Accounting Corporate Finance |
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Risk taking corporate taxes Accounting Corporate Finance LJUNGQVIST, Alexander ZHANG, Liandong ZUO, Luo Sharing risk with the government: How taxes affect corporate risk taking |
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Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on risk taking imposed by creditors. Finally, tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government. |
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LJUNGQVIST, Alexander ZHANG, Liandong ZUO, Luo |
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LJUNGQVIST, Alexander ZHANG, Liandong ZUO, Luo |
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LJUNGQVIST, Alexander |
title |
Sharing risk with the government: How taxes affect corporate risk taking |
title_short |
Sharing risk with the government: How taxes affect corporate risk taking |
title_full |
Sharing risk with the government: How taxes affect corporate risk taking |
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Sharing risk with the government: How taxes affect corporate risk taking |
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Sharing risk with the government: How taxes affect corporate risk taking |
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sharing risk with the government: how taxes affect corporate risk taking |
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Institutional Knowledge at Singapore Management University |
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2017 |
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https://ink.library.smu.edu.sg/soa_research/1628 https://ink.library.smu.edu.sg/context/soa_research/article/2655/viewcontent/Sharing_risk_with_the_government__How_taxes_affect_corporate_risk.pdf |
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